Timing of Non Concessional Contributions
If you are under age 65 at any time during a financial year you are permitted to bring forward two years' worth of Non Concessional Contributions ("3 Year Bring Forward Rule"), enabling you to contribute any amount up to $450,000 in a single year. Importantly the "3 Year Bring Forward Rule" is triggered at the time you make a Non Concessional Contribution exceeding $150,000 in one year, noting that you cannot exceed $450,000 in that year and the next 2 years. The timing of the Non Concessional Contributions can make a difference in terms of how much you can ultimately contribute as a Non Concessional Contribution to your SMSF and potentially save you thousands in tax!
An Example:
Barney is 63 and wishes to contribute $600,000 as a Non Concessional Contribution into his SMSF. In May 2011 he contributes $450,000 under the "3 Year Bring Forward Rule". This means that Barney cannot contribute again until 1 July 2013 (the 2014 financial year) meaning the balance of $150,000 will remain invested outside his SMSF. This will deprive Barney of valuable tax benefits given his SMSF is in Pension mode paying NIL Tax on earnings.
An alternative Strategy Barney could have adopted was to contribute a maximum of $150,000 before 30 June 2011 and not trigger the "3 Year Bring Forward Rule". This is within Barney's annual Maximum Non Concessional Contribution of $150,000. On 1 July 2011 Barney could contribute a further $450,000 Non Concessional Contribution using the "3 Year Bring Forward Rule". This will mean that the entire $600,000 could be made over a 2 month period rather than a 2 year period simply by planning the timing of the Non Concessional Contribution.
The Savings
The above strategy will mean that Barney will not have to wait until 1 July 2013 to make the additional Contribution of $150,000 into the SMSF. Assuming the additional $150,000 returns a 7% yield the additional income of $10,500 per annum would be taxed in Barney's personal name at his marginal tax rate rather than being tax free in the SMSF which is paying a Pension. Assuming that Barney is on the 31.50% personal tax rate in his personal name, Barney will save $3,307 per year or $6,615 over the 2 year period to 1 July 2013. Simply by timing his Non Concessional Contributions better!
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